Volvo's $1.7 billion truck rolls into clouded European market

By Niklas Pollard and Helena Soderpalm

5 Min Read

GOTHENBURG, Sweden (Reuters) - World No.2 truck maker Volvo (VOLVb.ST) launched its first all-new vehicle in 20 years on Thursday, hoping that better fuel economy, a roomier cab and improved handling will spur demand in an ailing European market and justify its biggest ever trucks investment.

The truck industry is extremely sensitive to the economic climate and fluctuations in international trade, so the Swedish company's new launch comes at a critical time for its top market, which is clouded by enormous uncertainty amid the European debt crisis.

The downturn and accompanying decline in European sales has already prompted Germany's MAN SE MANG.SE to announce a recruitment freeze and Fiat Industrial's FI.MI Iveco to unveil plans to close five truck plants.

Volvo, which sells trucks under the Renault, Mack, UD Trucks and Eicher brands as well as its own name, was showcasing its new Volvo-branded FH trucks, the fruit of 11.5 billion Swedish crowns ($1.7 billion) of investment and five years of development.

"This is a huge undertaking for us and one could also say that it is actually one of the largest industrial projects in Sweden," Chief Executive Olof Persson told a news conference at the group's Gothenburg headquarters.

The new truck is set to sell for about 5,000 euros more per vehicle than its predecessor and will come first to the European market, with production planned for early next year, before launches in markets such as Latin America and Australia.

There are no plans to sell the truck in the United States, where hugely different engines and designs are required.

But in Europe, the euro zone debt crisis has hammered demand in the south and eaten away at the resilience of larger markets farther north, leaving great uncertainty about the coming months.

"Normally, at this point in time, you need to come through July and August and then have September when everybody is back from vacation and the system is back and running again," Persson told Reuters, adding that he was confident in the launch, even in a difficult market.

"You can't time these kind of launches on the basis of the economic cycle."

Handelsbanken Capital Markets analyst Hampus Engellau estimated that truck makers have adjusted production to meet a market fall of about 5-6 percent in Europe this year.

"What the OEMs (original equipment makers) are wrestling with right now is whether what we are seeing is a seasonally weak July and August with the market coming back in September, or if we are seeing some further weakening after the summer," he said.

LOWER GEAR

Volvo is forecasting that the European market for heavy trucks will be about 230,000 units this year, a decline of only 5 percent or so. But what kind of market truck makers actually face will only become clear over the next several weeks.

The full-year views of some of Volvo's rivals are also glum, but all are a far cry from the collapse experienced during the 2008/09 financial crisis, when the entire global market went from top gear to a virtual standstill within months.

Instead, the European market has been losing speed gradually, leaving Volvo and world No.1 manufacturer Daimler (DAIGn.DE) cushioned by their global footprints and Scania SCVb.ST by a production system lauded as the best and most flexible in the business.

But the European malaise has weighed heavier on manufacturers that suffer from a poor market mix, such as MAN SE, which scaled back its 2012 profit margin target in July.

Iveco, the laggard of Fiat Industrial's units, delivered stronger than expected quarterly earnings, but only at the expense of cost cuts, more of which are in store as it shutters plants in France, Austria and Germany by year-end.

Market leader Daimler has said it can't rule out a European market contraction in the medium and heavy segment of up to 10 percent this year, while MAN has forecast a 5-10 percent drop for commercial vehicles.

U.S. company Paccar Inc's (PCAR.O) DAF has taken a similar view, though the bottom end of its market outlook would imply a 13 percent fall. Volvo's domestic rival Scania has not presented any official forecast.

A lack of solid European market data, especially during the vacation months of July and August, has added to the uncertainty on demand just as many key economic gauges, such as Germany's Ifo business climate index, have pointed to a deepening economic malaise.

"September will be important," said a truck sector analyst who asked not to be identified. "When everything starts turning negative, everybody starts thinking - how deep are we going to fall and how long will it take before we hit bottom?" ($1 = 6.7149 Swedish crowns)